1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ................. to ...................
Commission file number 1-13926
DIAMOND OFFSHORE DRILLING, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0321760
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
15415 Katy Freeway
Houston, Texas
77094
(Address of principal executive offices)
(Zip Code)
(281) 492-5300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of April 15, 1998 Common stock, $0.01 par value per share 139,328,160 shares
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DIAMOND OFFSHORE DRILLING, INC.
TABLE OF CONTENTS FOR FORM 10-Q
QUARTER ENDED MARCH 31, 1998
PAGE NO.
COVER PAGE.......................................................................................1
DOCUMENT TABLE OF CONTENTS.......................................................................2
PART I. FINANCIAL INFORMATION...................................................................3
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets...................................................3
Consolidated Statements of Income.............................................4
Consolidated Statements of Cash Flows.........................................5
Notes to Consolidated Financial Statements....................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.....................................................10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................15
PART II. OTHER INFORMATION......................................................................16
ITEM 1. LEGAL PROCEEDINGS..............................................................16
ITEM 2. CHANGES IN SECURITIES..........................................................16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................16
ITEM 5. OTHER INFORMATION..............................................................16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................16
SIGNATURES.......................................................................................17
INDEX OF EXHIBITS................................................................................18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
MARCH 31, DECEMBER 31,
----------- -----------
1998 1997
----------- -----------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ...................................................... $ 78,056 $ 102,958
Short-term investments ......................................................... 277,402 363,137
Accounts receivable ............................................................ 238,295 205,589
Rig inventory and supplies ..................................................... 34,363 33,714
Prepaid expenses and other ..................................................... 10,560 13,377
----------- -----------
Total current assets ......................................... 638,676 718,775
DRILLING AND OTHER PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION........................................................ 1,458,192 1,451,741
GOODWILL, NET OF ACCUMULATED AMORTIZATION ........................................... 117,005 118,623
LONG-TERM INVESTMENTS ............................................................... 177,486 --
OTHER ASSETS ........................................................................ 10,250 9,422
----------- -----------
Total assets ................................................. $ 2,401,609 $ 2,298,561
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................... $ 58,568 $ 57,557
Accrued liabilities ............................................................ 49,250 48,935
Taxes payable .................................................................. 47,095 24,653
----------- -----------
Total current liabilities .................................... 154,913 131,145
LONG-TERM DEBT....................................................................... 400,000 400,000
DEFERRED TAX LIABILITY............................................................... 225,210 209,513
OTHER LIABILITIES ................................................................... 23,607 22,376
----------- -----------
Total liabilities ............................................ 803,730 763,034
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock (par value $0.01, 25,000,000 shares authorized, none
issued or outstanding) ..................................................... -- --
Common stock (par value $0.01, 200,000,000 shares authorized, and
139,328,160 and 139,309,948 shares issued and outstanding at March 31,
1998 and December 31, 1997, respectively) .................................. 1,393 1,393
Additional paid-in capital...................................................... 1,302,784 1,302,712
Retained earnings .............................................................. 296,656 233,350
Accumulated other comprehensive losses ......................................... (2,954) (1,928)
----------- -----------
Total stockholders' equity ................................... 1,597,879 1,535,527
----------- -----------
Total liabilities and stockholders' equity ................... $ 2,401,609 $ 2,298,561
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
--------- --------
REVENUES ............................................ $ 286,069 $204,733
OPERATING EXPENSES:
Contract drilling ............................ 125,333 89,739
Depreciation and amortization ................ 31,999 25,812
General and administrative ................... 6,772 4,941
Gain on sale of assets ....................... (78) (65)
--------- --------
Total operating expenses ................ 164,026 120,427
--------- --------
OPERATING INCOME .................................... 122,043 84,306
OTHER INCOME (EXPENSE):
Interest income .............................. 6,585 2,893
Interest expense ............................. (3,843) --
Other, net ................................... (137) (185)
--------- --------
INCOME BEFORE INCOME TAX EXPENSE .................... 124,648 87,014
INCOME TAX EXPENSE .................................. (43,926) (30,784)
--------- --------
NET INCOME .......................................... $ 80,722 $ 56,230
========= ========
EARNINGS PER SHARE:
Basic ........................................ $ 0.58 $ 0.41
========= ========
Diluted ...................................... $ 0.56 $ 0.39
========= ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Common shares ................................ 139,325 136,768
Dilutive potential common shares ............. 9,876 6,036
--------- --------
Total weighted average shares outstanding 149,201 142,804
========= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
--------- ---------
OPERATING ACTIVITIES:
Net income ..................................................... $ 80,722 $ 56,230
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................ 31,999 25,812
Gain on sale of assets ....................................... (78) (65)
Loss on sale of investment securities ........................ 69 3
Deferred tax provision ....................................... 17,862 13,870
Accretion of discounts on investment securities .............. (2,609) (2,331)
Amortization of debt issuance costs .......................... 129 72
Changes in operating assets and liabilities:
Accounts receivable .......................................... (32,161) (7,887)
Rig inventory and other current assets ....................... 2,168 (5,054)
Other assets, non-current .................................... (957) (176)
Accounts payable and accrued liabilities ..................... 1,187 (1,836)
Taxes payable ................................................ 22,442 (7,632)
Other liabilities, non-current ............................... (569) 2,520
Other, net ..................................................... (350) 129
--------- ---------
Net cash provided by operating activities ................ 119,854 73,655
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures ........................................... (37,089) (73,923)
Proceeds from sales of assets .................................. 335 440
Net change in short-term investment securities ................. (261,065) (211,203)
Net change in investments through repurchase agreements ........ 350,000 --
Purchases of long-term investment securities ................... (179,732) (99,474)
--------- ---------
Net cash used in investing activities .................... (127,551) (384,160)
--------- ---------
FINANCING ACTIVITIES:
Payment of dividends ........................................... (17,416) --
Debt repayments, net ........................................... -- (73,000)
Issuance of convertible subordinated notes ..................... -- 400,000
Debt issuance costs ............................................ -- (5,750)
Proceeds from stock options exercised .......................... 211 333
--------- ---------
Net cash (used in) provided by financing activities ...... (17,205) 321,583
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS .............................. (24,902) 11,078
Cash and cash equivalents, beginning of period ................. 102,958 28,180
--------- ---------
Cash and cash equivalents, end of period ....................... $ 78,056 $ 39,258
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of Diamond Offshore Drilling,
Inc. and subsidiaries (the "Company") should be read in conjunction with the
Annual Report on Form 10-K for the year ended December 31, 1997 (File No.
1-13926).
Interim Financial Information
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all disclosures required by
generally accepted accounting principles for complete financial statements. The
consolidated financial information has not been audited but, in the opinion of
management, includes all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the consolidated balance sheets,
statements of income, and statements of cash flows at the dates and for the
periods indicated. Results of operations for interim periods are not necessarily
indicative of results of operations for the respective full years.
Cash and Cash Equivalents
Short-term, highly liquid investments that have an original maturity of
three months or less which are considered part of the Company's cash management
activities rather than part of its investing activities are considered cash
equivalents.
Investments
The Company's investments are classified as available for sale and
stated at fair value under the terms of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Accordingly, any unrealized gains and losses, net of taxes,
are recorded as a separate component of stockholders' equity until realized. The
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity and such adjustments are included in interest income.
The cost of debt securities sold is based on the specific identification method
and the cost of equity securities sold is based on the average cost method.
Realized gains or losses and declines in value, if any, judged to be other than
temporary are reported in the Consolidated Statements of Income in "Other income
(expense)."
Supplementary Cash Flow Information
Cash payments made for interest on long-term debt, including commitment
fees, during the three months ended March 31, 1998 and 1997 totaled $7.5 million
and $0.5 million, respectively. Cash payments made for income taxes during the
three months ended March 31, 1998 and 1997 totaled $4.2 million and $24.4
million, respectively.
Capitalized Interest
Interest cost for construction and upgrade of qualifying assets is
capitalized. During the three months ended March 31, 1998, the Company incurred
interest cost, including amortization of debt issuance costs, of $3.9 million.
Interest cost capitalized during the three months ended March 31, 1998 was not
material. Total interest cost incurred of $2.8 million was capitalized during
the three months ended March 31, 1997.
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Goodwill
Goodwill from the merger with Arethusa (Off-Shore) Limited ("Arethusa")
is amortized on a straight-line basis over 20 years. Amortization expense
totaled $1.6 million and $1.7 million for the three months ended March 31, 1998
and 1997, respectively.
Debt Issuance Costs
Debt issuance costs are included in the Consolidated Balance Sheets in
"Other assets" and are amortized over the term of the related debt.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income is the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. For the three months ended March 31, 1998 and 1997,
comprehensive income totaled $79.7 million and $55.5 million, respectively.
Comprehensive income includes net income, foreign currency translation losses
and unrealized holding losses on investments.
Net Income Per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share,"
which requires dual presentation of basic and diluted earnings per share for
entities with complex capital structures. Basic earnings per share excludes
dilution and is computed by dividing net income by the weighted average number
of common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. Diluted
earnings per share was calculated by dividing net income, adjusted to eliminate
the after-tax effect of interest expense, by the weighted average number of
common shares outstanding and the weighted average number of shares issuable
assuming full conversion of the convertible subordinated notes as of the
issuance date, February 4, 1997.
Weighted average shares outstanding and all per share amounts included
herein for all periods presented have been restated to include the retroactive
effect of the July 1997 two-for-one stock split in the form of a stock dividend.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimated.
Reclassifications
Certain amounts applicable to the prior periods have been reclassified
to conform to the classifications currently followed. Such reclassifications do
not affect earnings.
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2. INVESTMENTS
Investments classified as available for sale at March 31, 1998 were as
follows:
------------------------------------
UNREALIZED MARKET
COST GAIN (LOSS) VALUE
--------- --------- ---------
(IN THOUSANDS)
Debt securities issued by the U.S. Treasury
Due within one year ......................... $ 263,575 $ (492) $ 263,083
Due after one year through five years ....... 179,217 (1,731) 177,486
Equity securities ................................ 13,300 1,019 14,319
--------- --------- ---------
Total ....................................... $ 456,092 $ (1,204) $ 454,888
========= ========= =========
During the three months ended March 31, 1998, certain debt securities
due within one year were sold for proceeds of $95.4 million. The resulting
realized loss was not material. Also during the three months ended March 31,
1998, investments through repurchase agreements with third parties were sold for
their contracted amounts totaling $350.0 million.
3. DRILLING AND OTHER PROPERTY AND EQUIPMENT
Cost and accumulated depreciation of drilling and other property and
equipment are summarized as follows:
MARCH 31, DECEMBER 31,
----------- -----------
1998 1997
----------- -----------
(IN THOUSANDS)
Drilling rigs and equipment ....... $ 1,818,014 $ 1,781,107
Construction work in progress ..... 16,444 17,696
Land and buildings ................ 12,615 12,552
Office equipment and other ........ 11,665 10,551
----------- -----------
Cost ......................... 1,858,738 1,821,906
Less accumulated depreciation ..... (400,546) (370,165)
----------- -----------
Total ................... $ 1,458,192 $ 1,451,741
=========== ===========
4. GOODWILL
The merger with Arethusa generated an excess of the purchase price over
the estimated fair value of the net assets acquired. Cost and accumulated
amortization of such goodwill are summarized as follows:
MARCH 31, DECEMBER 31,
--------- ---------
1998 1997
--------- ---------
(IN THOUSANDS)
Goodwill .......................... $ 129,746 $ 129,746
Less accumulated amortization ..... (12,741) (11,123)
--------- ---------
Total ................... $ 117,005 $ 118,623
========= =========
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5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
MARCH 31, DECEMBER 31,
------- -------
1998 1997
------- -------
(IN THOUSANDS)
Personal injury and other claims ................................ $23,851 $23,960
Payroll and benefits ............................................ 17,443 15,951
Interest payable ................................................ 1,917 5,684
Other ........................................................... 6,039 3,340
------- -------
Total ................................................. $49,250 $48,935
======= =======
6. COMMITMENTS AND CONTINGENCIES
The survivors of a deceased employee of a subsidiary of the Company,
Diamond M Onshore, Inc., sued such subsidiary in Duval County, Texas, for
damages as a result of the death of the employee. The plaintiffs obtained a
judgment in the trial court for $15.7 million plus post-judgment interest. The
Company has appealed the judgment and is currently awaiting the opinion of the
appellate court. The Company has received notices from certain of its insurance
underwriters reserving their rights to deny coverage on the Company's insurance
policies in excess of $2.0 million for damages resulting from such lawsuit.
Management believes the Company has complied with all conditions of coverage for
final unappealable damages, if any, in the case. While the ultimate liability in
this matter is difficult to assess, it is management's belief that the final
outcome is not reasonably likely to have a material adverse effect on the
Company's consolidated financial position, results of operations, or cash flows.
The Company has not established a liability for such claim at this time.
A former subsidiary of Arethusa, which is now a subsidiary of the
Company, defended and indemnified Zapata Off-Shore Company and Zapata
Corporation (the "Zapata Defendants"), pursuant to a contractual defense and
indemnification agreement, in a suit for tortious interference with contract and
conspiracy to tortiously interfere with contract. The plaintiffs sought $14.0
million in actual damages and unspecified punitive damages, plus costs of court,
interest and attorneys' fees. In November 1997, the jury awarded a take nothing
judgment in favor of the Zapata Defendants. The plaintiffs have appealed the
judgment. No provision for any liability has been established at this time.
Various other claims have been filed against the Company in the
ordinary course of business, particularly claims alleging personal injuries.
Management believes the Company has established adequate reserves for any
liabilities that may reasonably be expected to result from these claims. In the
opinion of management, no pending or threatened claims, actions or proceedings
against the Company are expected to have a material adverse effect on the
Company's consolidated financial position, results of operations, or cash flows.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements (including the Notes thereto)
included elsewhere herein.
The Company is a leader in deep water drilling with a fleet of 46
offshore drilling rigs. The fleet consists of 30 semisubmersibles, 15 jack-ups
and one drillship which operate in the waters of six of the world's seven
continents.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Comparative data relating to the Company's revenues and operating
expenses by equipment type are listed below (eliminations offset dayrate
revenues earned when the Company's rigs are utilized in its integrated services
operations and intercompany expenses charged to rig operations). Certain amounts
applicable to the prior period have been reclassified to conform to the
classifications currently followed. Such reclassifications do not affect
earnings.
During November 1997, July 1997, and March 1997, the Company completed
its major upgrades of the Ocean Victory, the Ocean Clipper I, and the Ocean
Star, respectively, expanding those rigs to have fourth-generation capabilities.
Upon completion, these rigs were included in Fourth-Generation Semisubmersibles
for discussion purposes (prior period information will continue to include these
rigs in Other Semisubmersibles).
THREE MONTHS ENDED
MARCH 31,
--------------------------- INCREASE/
1998 1997 (DECREASE)
--------- --------- ---------
(in thousands)
REVENUES
Fourth-Generation Semisubmersibles ......... $ 70,945 $ 42,643 $ 28,302
Other Semisubmersibles ..................... 153,274 116,833 36,441
Jack-ups ................................... 60,086 43,554 16,532
Integrated Services ........................ 15,711 4,311 11,400
Other ...................................... -- -- --
Eliminations ............................... (13,947) (2,608) (11,339)
--------- --------- ---------
Total Revenues ..................... $ 286,069 $ 204,733 $ 81,336
========= ========= =========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles ......... $ 20,615 $ 11,473 $ 9,142
Other Semisubmersibles ..................... 79,276 55,336 23,940
Jack-ups ................................... 21,160 21,260 (100)
Integrated Services ........................ 15,505 4,259 11,246
Other ...................................... 2,724 361 2,363
Eliminations ............................... (13,947) (2,950) (10,997)
--------- --------- ---------
Total Contract Drilling Expense .... $ 125,333 $ 89,739 $ 35,594
========= ========= =========
OPERATING INCOME
Fourth-Generation Semisubmersibles ......... $ 50,330 $ 31,170 $ 19,160
Other Semisubmersibles ..................... 73,998 61,497 12,501
Jack-ups ................................... 38,926 22,294 16,632
Integrated Services ........................ 206 52 154
Other ...................................... (2,724) (361) (2,363)
Eliminations ............................... -- 342 (342)
Depreciation and Amortization Expense ...... (31,999) (25,812) (6,187)
General and Administrative Expense ......... (6,772) (4,941) (1,831)
Gain on Sale of Assets ..................... 78 65 13
--------- --------- ---------
Total Operating Income ............. $ 122,043 $ 84,306 $ 37,737
========= ========= =========
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Revenues. The $28.3 million increase in revenues from fourth-generation
rigs resulted primarily from $16.9 million in revenues generated during the
three months ended March 31, 1998 by the Ocean Victory, the Ocean Clipper I and
the Ocean Star upon completion of their upgrade projects and $11.4 million in
revenues generated during the same period by increased operating dayrates. The
$36.4 million increase in revenues from other semisubmersibles resulted
primarily from $45.7 million in revenues generated during the three months ended
March 31, 1998 by increased operating dayrates and $6.9 million in revenues
generated by the Ocean Century, which returned to work after reactivation in the
fourth quarter of 1997. Partially offsetting the increases in revenues were
decreases in the first quarter of 1998 of $14.6 million primarily due to
revenues foregone during mandatory inspections and a $1.6 million decrease in
revenues due to the sale of the Ocean Zephyr in 1997. The $16.5 million increase
in revenues from jack-ups resulted primarily from $20.5 million in revenues
contributed by increased operating dayrates, primarily in the Gulf of Mexico. In
addition, a decrease of $5.5 million in revenues from the first quarter of 1997
resulted from the Ocean Tower being in the shipyard for upgrades and the
relinquishment of the Miss Kitty (a bareboat chartered rig) to the owner in late
1997. The $11.4 million increase in revenues from integrated services resulted
from additional projects and increased rates as compared to the same period in
1997.
Contract Drilling Expense. The $9.1 million increase in contract
drilling expense for fourth-generation rigs resulted primarily from operating
costs generated by the Ocean Victory, the Ocean Clipper I and the Ocean Star
upon completion of their upgrade projects. The $23.9 million increase in
contract drilling expense for other semisubmersibles was primarily due to costs
for mandatory inspections and associated repairs during the three months ended
March 31, 1998. Contract drilling expense for jack-ups was relatively unchanged
from the three months ended March 31, 1997. The $11.2 million increase in
expenses from integrated services resulted from additional projects and
increased rates as compared to the same period in 1997. Other contract drilling
expense increased $2.4 million primarily due to crew training programs,
maintenance and repairs on spare equipment, and various other non-recurring
charges.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the three months ended March 31, 1998 of $32.0 million increased
$6.2 million from $25.8 million for the three months ended March 31, 1997
primarily due to an increase in the 1998 budgeted capital additions as compared
to those budgeted in 1997 and additional expense for the Ocean Victory, the
Ocean Clipper I, and the Ocean Star upon completion of their upgrades.
General and Administrative Expense. General and administrative expense
for the three months ended March 31, 1998 of $6.8 million increased $1.9 million
from $4.9 million for the three months ended March 31, 1997 primarily due to
increased accruals associated with the Company's management bonus and retention
plan. Other increases resulted from costs associated with ongoing litigation and
additional personnel. Also, general and administrative costs capitalized to
fourth-generation upgrade projects decreased as compared to the same period in
the prior year.
Interest Income. Interest income of $6.6 million for the three months
ended March 31, 1998 increased $3.7 million from $2.9 million for the same
period in 1997. This increase resulted primarily from the investment of
additional excess cash in 1998. See " - Liquidity."
Income Tax Expense. Income tax expense of $43.9 million for the three
months ended March 31, 1998 increased $13.1 million from $30.8 million for the
three months ended March 31, 1997. This increase resulted primarily from the
$37.6 million increase in income before income tax expense as compared to the
three months ended March 31, 1997.
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OUTLOOK
The Company continues to benefit from increased demand and from the
tight supply of major offshore drilling rigs worldwide. These conditions are
due, in part, to the impact of technological advances, including 3-D seismic,
horizontal drilling, and subsea completion procedures, on oil and gas
exploration and development economics. To address the current tight supply
situation, customers seek to contract rigs for term commitments (as opposed to
contracts for the drilling of a single well or a group of wells) in many cases,
and often will pay for upgrades and modifications necessary for more challenging
drilling locations in order to assure rig availability. The Company seeks to
have a foundation of long-term contracts with a reasonable balance of short-term
or well-to-well contracts to minimize risk while participating in the benefit of
increasing dayrates.
The Company continues to enhance its fleet to meet customer demand for
diverse drilling capabilities, including those required for deep water and harsh
environment operations. The Company has begun the conversion of the Ocean
Confidence (formerly named Polyconfidence) from an accommodation vessel to a
semisubmersible drilling unit capable of operating in harsh environments and
ultra-deep waters. See " - Capital Resources." The upgrade is anticipated to be
completed in late 1999, when the rig will begin a five-year commitment in the
Gulf of Mexico.
The Company completed the upgrade of the Ocean Clipper I in July 1997,
however, the drillship has experienced certain subsea system difficulties
primarily associated with new technology for operations in deep water as well as
difficulties with the vessel's thrusters. While the drillship is operating under
its drilling contract in the Gulf of Mexico, the Company continues to
participate in developing design revisions that will provide long-term benefits
to the affected systems. Results of operations are likely to be adversely
impacted by additional downtime from such difficulties, however, the Company
cannot predict the extent of such adverse impact.
In February 1998, a fire was detected in the engine room of the Ocean
Victory, which was operating in the Gulf of Mexico. Although the fire was
contained and extinguished, damage was done to the power and electrical systems
aboard the rig. The rig is currently in the shipyard for necessary repairs,
which are expected to be completed by mid-1998. The Company expects that its
insurance will cover most of the cost of such repairs, however the loss of
revenue during the repair period is not covered by insurance. As a result, the
loss of revenues will reduce the Company's results of operations for 1998.
The ability to minimize costs and downtime is critical to the Company's
results of operations. The improved opportunities for the offshore contract
drilling industry worldwide have resulted in increased demand for and a shortage
of experienced personnel and equipment, including drill pipe and riser,
necessary on offshore drilling rigs. The Company does not consider the shortage
of such personnel and equipment currently to be a material factor in its
business. However, because of the increased demand for oil field services, a
significant increase in costs, including compensation and training, may occur if
present trends continue for an extended period. In addition, because of periodic
inspections required by certain regulatory agencies, 15 of the Company's rigs
will be in the shipyard for a portion of 1998. At March 31, 1998, five of these
15 inspections were completed and one was in progress. The Company intends to
focus on returning these rigs to operations as soon as reasonably possible, in
order to minimize the downtime and associated loss of revenues.
In addition, the improvement in the current results of operations and
prospects for the offshore contract drilling industry as a whole has led to
increased rig construction and enhancement programs by the Company's
competitors. A significant increase in the supply of technologically advanced
rigs capable of drilling in deep water may have an adverse effect on the average
operating dayrates for the Company's rigs, particularly its more advanced
semisubmersible units, and on the overall utilization level of the Company's
fleet. In such case, the Company's results of operations would be adversely
affected.
The offshore contract drilling industry historically has been highly
competitive and cyclical and, although not currently a material factor in the
Company's markets, weak commodity prices, economic problems in countries outside
the United States, or a number of other influencing factors could curtail
spending by oil and gas companies and possibly depress the offshore drilling
industry. Therefore, the Company cannot predict whether and, if so, to what
extent, current market conditions will continue.
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LIQUIDITY
As of March 31, 1998, cash and investments totaled $532.9 million, up
from $466.1 million at December 31, 1997. Cash provided by operating activities
for the three months ended March 31, 1998 increased by $46.2 million to $119.9
million, as compared to $73.7 million for the comparable period of the prior
year. This increase in operating cash flow was primarily attributable to a $24.5
million increase in net income for the first quarter of 1998, a $6.2 million
increase in depreciation and amortization expense, and various changes in
operating assets and liabilities.
Investing activities used $127.6 million in cash during the three
months ended March 31, 1998, compared to $384.2 million during the comparable
period of 1997. The decrease resulted primarily from the initial investment of
excess cash generated primarily by the issuance of $400.0 million of convertible
subordinated notes (the "Notes") in February 1997.
The payment of a dividend to stockholders resulted in cash used by
financing activities for the three months ended March 31, 1998 of $17.4 million.
Cash provided by financing activities for the three months ended March 31, 1997
totaled $321.6 million. Sources of financing during the first quarter of 1997
consisted primarily of the issuance of the Notes.
The Company has the ability to issue an aggregate of approximately
$117.5 million in debt, equity and other securities under a "shelf" registration
statement. In addition, the Company may issue, from time to time, up to eight
million shares of common stock, which shares are registered under an
"acquisition shelf" registration statement (upon effectiveness of an amendment
thereto reflecting the effect of the two-for-one stock split declared in July
1997), in connection with one or more acquisitions by the Company of securities
or assets of other businesses.
The Company believes that it has the financial resources needed to meet
its business requirements in the foreseeable future, including capital
expenditures for major upgrades, continuing rig enhancements as well as working
capital requirements.
CAPITAL RESOURCES
Cash requirements for capital commitments result from rig upgrades to
meet specific customer requirements and from the Company's continuing rig
enhancement program, including top-drive drilling system installations and water
depth and drilling capability upgrades. It is management's opinion that
operating cash flow resulting from current conditions of improved dayrates and
high utilization, in conjunction with proceeds from the Notes, will be
sufficient to meet these capital commitments. In addition, the Company may, from
time to time, issue debt or equity securities, or a combination thereof, to
finance capital expenditures, the acquisition of assets and businesses, or for
general corporate purposes. The Company's ability to effect any such issuance
will be dependent on the Company's results of operations, its current financial
condition and other factors beyond its control.
The Company has budgeted $108.5 million for rig upgrade capital
expenditures during 1998. During the three months ended March 31, 1998, the
Company expended $20.3 million, including capitalized interest expense, for
significant rig upgrades. Such upgrade projects include the conversion of the
Ocean Confidence (formerly named Polyconfidence), from an accommodation vessel
to a semisubmersible drilling unit capable of operating in harsh environments
and ultra-deep waters. The conversion includes enhancements which will provide
capabilities greater than existing fourth-generation equipment: capability for
operation in 7,500 foot water depths, approximately 6,000 tons variable deck
load, a 15,000 psi blow-out prevention system and four mud pumps to complement
the existing Class III dynamic-positioning system. Upon completion of the
conversion, the rig will begin a five-year drilling program in the Gulf of
Mexico, which is anticipated to commence in late 1999.
Other upgrade projects include the cantilever conversion project on the
Ocean Warwick, a jack-up drilling rig located in the Gulf of Mexico, which was
completed in March 1998. In addition, leg strengthening and other modifications
on the Ocean Tower, a jack-up drilling rig operating in the Gulf of Mexico, are
anticipated to be completed in the first half of 1998.
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The Company has also budgeted $126.7 million for 1998 capital
expenditures associated with its continuing rig enhancement program, spare
equipment and other corporate requirements. These expenditures include purchases
of anchor chain, drill pipe, riser, and other drilling equipment. During the
three months ended March 31, 1998, the Company expended $16.8 million on this
program.
The Company is continually considering potential transactions
including, but not limited to, enhancement of existing rigs, the purchase of
existing rigs, construction of new rigs and the acquisition of other companies
engaged in contract drilling. Certain of the potential transactions reviewed by
the Company would, if completed, result in its entering new lines of business,
although, in general, these opportunities have been related in some manner to
the Company's existing operations. For example, the Company has explored the
possibility of acquiring certain floating production systems, crew accommodation
units similar to the Ocean Confidence (formerly named Polyconfidence), oil
service companies providing subsea products, technology and services, oil and
gas exploration companies, and shipping assets such as oil tankers, through the
acquisition of existing businesses or assets or new construction. Although the
Company does not, as of the date hereof, have any commitment with respect to a
material acquisition, it could enter into such an agreement in the future and
such acquisition could result in a material expansion of its existing operations
or result in its entering a new line of business. Some of the potential
acquisitions considered by the Company could, if completed, result in the
expenditure of a material amount of funds or the issuance of a material amount
of debt or equity securities.
YEAR 2000 ISSUES
The Company has addressed the impact of the upcoming change in the
century on the Company's business, operations, and financial condition. The
impact is dependent upon many factors, including the Company's software and
hardware, as well as that of the Company's suppliers, customers, creditors, and
financial service organizations. While the cost of addressing Year 2000 issues
is not anticipated to be material, the Company is continuing to monitor, on an
ongoing basis, the problems and uncertainties associated with these issues and
their consequences.
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made or incorporated by reference
from time to time by the Company or its representatives are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include, without limitation, any statement
that may project, indicate or imply future results, performance or achievements,
and may contain the words "expect," "intend," "plan," "anticipate," "estimate,"
"believe," "will be," "will continue," "will likely result," and similar
expressions. Such statements inherently are subject to a variety of risks and
uncertainties that could cause actual results to differ materially from those
projected. Such risks and uncertainties include, among others, general economic
and business conditions, operating difficulties arising from shortages of
equipment or qualified personnel or as a result of other causes, casualty
losses, industry fleet capacity, changes in foreign and domestic oil and gas
exploration and production activity, competition, changes in foreign political,
social and economic conditions, regulatory initiatives and compliance with
governmental regulations, the ability to attract and retain qualified personnel,
customer preferences and various other matters, many of which are beyond the
Company's control. The risks included here are not exhaustive. Other sections of
this Report and the Company's other filings with the Securities and Exchange
Commission include additional factors that could adversely impact the Company's
business and financial performance. Given these risks and uncertainties,
investors should not place undue reliance on forward-looking statements. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement to reflect any change
in the Company's expectations with regard thereto or any change in events,
conditions or circumstances on which any forward-looking statement is based.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate and Equity Price Sensitivity
The Company's financial instruments that are potentially sensitive to
changes in interest rates include the Notes and investments in debt securities.
In addition, the Company's investment in equity securities is sensitive to
equity price risk. The Notes, which are due February 15, 2007, have a stated
interest rate of 3.75 percent and an effective interest rate of 3.93 percent. At
March 31, 1998, the fair value of the Company's investment in debt securities
issued by the U.S. Treasury was approximately $440.6 million, which includes an
unrealized holding loss of $2.2 million. The fair value of the Company's
investment in equity securities at March 31, 1998 was approximately $14.3
million, which includes an unrealized holding gain of $1.0 million. Based on the
nature of these financial instruments and consideration of past market movements
and reasonably possible near-term market movements, the Company does not
believe that potential near-term losses in future earnings, fair values, or
cash flows are likely to be material.
Exchange Rate Sensitivity
Other than trade accounts receivable and trade accounts payable, the
Company does not currently have financial instruments that are sensitive to
foreign currency exchange rates.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Brown Services, Inc. and KOS Industries, Inc. v. Michael D. Brown, BSI
International, Inc., Robert Brown, Robert Furlough, Power House International,
Inc., Zapata Off-Shore Company and Zapata Corporation; No. 92-05691 in the 334th
Judicial District Court of Harris County, Texas, filed February 7, 1992.
Plaintiffs sued Zapata Off-Shore Company and Zapata Corporation (the "Zapata
Defendants") for tortious interference with contract and conspiracy to
tortiously interfere with contract seeking $14.0 million in actual damages and
unspecified punitive damages, plus costs of court, interest and attorneys' fees.
A former subsidiary of Arethusa, which is now a subsidiary of the Company,
defended and indemnified the Zapata Defendants pursuant to a contractual defense
and indemnification agreement. In November 1997, the jury awarded a take nothing
judgment in favor of the Zapata Defendants. The plaintiffs appealed the judgment
in March 1998.
The Company and its subsidiaries are named defendants in certain other
lawsuits and are involved from time to time as parties to governmental
proceedings, all arising in the ordinary course of business. For a description
of one such lawsuit, see Note 6 to the Company's Consolidated Financial
Statements in Part I of this Report. Although the outcome of lawsuits or other
proceedings involving the Company and its subsidiaries cannot be predicted with
certainty and the amount of any liability that could arise with respect to such
lawsuits or other proceedings cannot be predicted accurately, management does
not expect these matters to have a material adverse effect on the financial
position, results of operations, or cash flows of the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Index of Exhibits for a list of those exhibits filed herewith.
(b) There were no reports on Form 8-K filed during the first quarter of
1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIAMOND OFFSHORE DRILLING, INC.
(Registrant)
Date 29-Apr-1998 By: \s\ Gary T. Krenek
--------------------------- ---------------------------
Gary T. Krenek
Vice President and Chief
Financial Officer
Date 29-Apr-1998 \s\ Leslie C. Knowlton
--------------------------- ---------------------------
Leslie C. Knowlton
Controller and Principal
Accounting Officer
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INDEX OF EXHIBITS
Exhibit No. Description
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3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995).
3.2* Amended By-laws of the Company.
3.2.1* Amendment of the Company's By-laws on November 8, 1995.
3.2.2* Amendment of the Company's By-laws on April 3, 1996.
3.2.3* Amendment of the Company's By-laws on March 31, 1998.
4.1 Indenture, dated as of February 4, 1997, between the Company
and Chase Manhattan Bank, as Trustee (incorporated by reference
to Exhibit 4.1 of the Company's Current Report on Form 8-K filed
February 11, 1997).
4.2 Supplemental Indenture, dated as of February 4, 1997,
between the Company and Chase Manhattan Bank, as Trustee
(incorporated by reference to Exhibit 4.2 of the Company's
Current Report on Form 8-K filed February 11, 1997).
11.1* Statement Re Computation of Per Share Earnings.
27.1* Financial Data Schedule for the interim year to date period ended
March 31, 1998.
27.2* Financial Data Schedule, as restated for the interim year
to date periods ended March 31, 1997, June 30, 1997, and
September 30, 1997 and the year ended December 31, 1997.
27.3* Financial Data Schedule, as restated for the interim year to date
periods ended March 31, 1996, June 30, 1996, and September 30,
1996 and the year ended December 31, 1996.
27.4* Financial Data Schedule, as restated for the year ended December
31, 1995.
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* Filed herewith.
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